Small-business exchange pushed by SEC panel

Small and micro-cap firms seek disclosure and tick increment relief

By

RonaldD. Orol

WASHINGTON (MarketWatch) — A panel that advises the Securities and Exchange Commission is likely to recommend that a new exchange be created to cut costs and improve liquidity for the nation’s thousands of micro and small-capitalization public companies.

Christine Jacobs, the co-chair of the Advisory Committee on Small and Emerging Companies, told MarketWatch that the panel is expected to vote on recommendations urging the SEC’s support for the setting up of a stock exchange for small public companies as well as an expansion of the number of small public companies that can qualify for exemptions from certain disclosure requirements.

Christine Jacobs, CEO Theragenics Corp.

“We have to throw some assistance to the micro and small capitalization companies in the way of disclosure,” said Jacobs, who is also the CEO of a small-cap medical device manufacturer.

“Instead of painting of all public companies with the same broad brush, we should create an environment [exchange] for the little guys. That would help improve liquidity for smaller firms.”

The committee, made up of 20 individuals in the small publicly traded business space including angel investors, state regulators and small bank executives, has scheduled a meeting at the SEC to discuss the recommendations for Feb. 1. Jacobs said that the recommendations are based on a compilation of comments made by the panel members in recent meetings.

SEC spokesman John Nester said the agency looks forward to receiving the committee’s recommendation. Spokesmen for Nasdaq
NDAQ, +0.08%
and the NYSE Euronext
US:NYX
did not return calls.

Jacobs said that the recommended exchange could be run by the NYSE, Nasdaq or “any player licensed to do the job.”

The number of small capitalization companies is large. According to Grant Thornton, 81% of all listed companies are small-cap or smaller, representing cumulatively 6.6% of total listed company value.

The advisory meeting will be followed by a meeting scheduled at the SEC set for Feb. 5 to discuss whether the existing penny spread, known as a tick, between bids and offers should be widened.

(A tick is the minimum pricing increment that can be used to trade securities).

Jacobs said that wider increments between bids and offers would help kick some life into illiquid, small public companies by giving small boutique investment banks greater incentive to trade more in micro-cap and small public companies.

Justin Schack, a managing director at Rosenblatt Securities, said he wondered whether the suggested exchange for small capitalization companies would just be for their original listing, with trading occurring on all exchanges based on existing rules.

Schack said one alternative could be to create an exclusive exchange just for the trading of these smaller institutions, exempting them from trading in other exchanges. That way, any rules designed specifically for these companies might more easily be applied to all of their trading activity, not just the portion that occurs on the new exchange.

However, he added that any of these approaches adds technological complexity and the potential for unintended consequences.

Jacobs contends that the medical device manufacturer she oversees, Theragenics Corp.
US:TGX
is illiquid and has a low average daily trading volume when compared to larger corporations. Companies like hers, Jacobs notes, have a difficult time meeting the liquidity needs of investors.

She says other small public companies have similar issues, and she questioned why companies with no liquidity and a depressed share price want to be public at all.

“We don’t have liquidity in our stock these days, we have no coverage, or minimal coverage, and the only reason that a smaller micro stock company gets on an exchange is to access capital,” Jacobs said. “You need to attract investors. Once you get them you have to meet their needs for liquidity. They want to make a return and exit at the appropriate time.”

Jacobs said that with wider tick sizes small boutique banks could generate more revenues as intermediary market-makers by creating markets for buyers and sellers and improving liquidity in currently illiquid stocks.

All this, she says, will give the institution’s more capital to invest in hiring research analysts to cover small-capitalization companies, increasing the amount of information available to potential investors and acting as a catalyst for investment in the firms, driving IPOs and job creation.

However, critics argue that wider tick sizes will hike costs on investors.

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